The large railroad company CSX Corporation reported earnings on Tuesday, and the message was loud and clear for Jim Cramer: its business is struggling.
First-quarter earnings for CSX came in at 37 cents per share, compared with 45 cents per share last year. Additionally, revenues for the quarter declined 14 percent, and CSX acknowledged that volumes will slip again for the second quarter.
So, why the heck did the stock rally on Wednesday?
"Companies have seen these declines coming. They have taken action. They are doing far better than we thought possible even a year ago," the "Mad Money" host said.
Unfortunately, 10 out of 12 types of cargo are also expected to be down next quarter. This includes coal, which Cramer thinks could be going away all together. The combination of tremendous oversupply in the U.S., a strong dollar for exports and a huge shift from coal to natural gas in major utilities has led to a 31 percent drop in business.
Cramer was stunned by CSX's expense control from its management. It has pulled off a 12 percent improvement versus last year, and has continued to make far more money with less sales and headcount.
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That is a reason to buy the stock, Cramer said, but only for investors who believe three things. First, that the global economy could get better, which could drive volumes. Second, that CSX will be able to keep costs down to allow gross margins to expand. The third is that CSX will not lose its business to trucking.
"There is a belief that better productivity combined with increased traffic is going to make this stock look mighty cheap a year from now," Cramer said.
The story of CSX is just one of many stories that Cramer expects to hear repeated in earnings season. He heard a similar story from Alcoa on Monday, and from the oil patch.
Ultimately, companies may have seen these declines coming and shifted business to accommodate, which is why they are doing better than most though.
What if things get better?
"Huge earnings swings, swings so fabulous that you will want to own the stock snow, before the earnings turn, especially with a stock like CSX," Cramer said.
That is Cramer's recipe to how stocks can go higher on bad news. These stocks already reflect the bad news, and that is when Cramer says investors should buy — not when they are already roaring.
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